The Days of Negotiating (Price) Are Largely Over—For Now

Now, before I dive into this you need to understand that I am talking about the right here and now in my home market of Kansas City. As of today. Now. Not 6 months before, not 6 months after. But Right. Now. So read this with the knowledge that a few months from now my blog post might sound quite different than today.

What I mean by the title is not true, on its face value. Of course every facet of a real estate deal is a negotiation. And while price will be something that is negotiated, there is a certain segment of our inventory on the market right now that make you feel more like you are at an auction where a reserve has been set and you are in a bidding war. Because if the house is priced right, in a good neighborhood, and in good condition, the seller can reasonably expect there to be multiple offers in a short amount of time. In some cases resulting in offers higher than their asking price. The housing inventory is just that low, and buyers that plentiful.

Perhaps a better title would be, “The days of getting a “deal” are over.” Probably more accurate, but less attention drawing.

This presents a problem for some home buyers in that in many situations they will have to pay MORE than list price to get the house. And it is hard for buyers to wrap their heads around this idea. Unless you are around auctions frequently, this is not a normal occurrence in your life. You are used to paying what is on the price tag, maybe less with coupons and sales. So the concept of paying a seller more than their asking price can be a leap.

But, right now, in some cases it is a must if you want the house.

So how do we prepare ourselves for this before we head out on the hunt for a house?

First, you have to understand that the seller is only setting the price of their house based on what other comparable houses in their neighborhood are selling or have sold for. This is an educated guess, not an itemized list of all the features, their costs or values coming up with a price with pinpoint accuracy. That would be nearly impossible to do. There are over 60,000 moving parts in a house. Those parts are all of different grade of material, age, size, etc. Therefore, even similar houses can actually be quite different, leading to different valuations. We are not car shopping here, where for the most part the same make/model of one car will more or less be the same as another. Minus a few factors.

The process of coming up with a good list price for a house goes like this. An agent and a seller will first decide on a range of prices that make up the current and past sales for that neighborhood. Then will narrow that down to similar houses to the subject property. In some neighborhoods, that the range could be a several thousand dollar swing low and high. The easy thing would be to assume that they decide on the highest possible price they can. But sometimes, that is not the best strategy. For instance, if the range is $195,000-$205,000 for their house, a price of $199,000 might make the most sense for the seller because a popular price cutoff point for buyer searches is $200,000. Go with the higher price and you would be missing out on large pool of buyers who are likely to be interested in your house, but won’t see it in their searches.

So in this example, you can see that just because someone may need to offer $201,000, that doesn’t mean you are offering more than the house is worth. Because it might actually be worth that higher amount.

Some other factors could be at play as well. Perhaps the seller needs to sell their house fast, so they are asking for less to get a quick sale. Maybe the real estate agent they hired didn’t go through the exercise above, doesn’t know the area, or is simply not very good at their job (which does happen) and the seller took their price recommendation at face value and the valuation was wrong. Both of these examples could mean you are paying more than asking price, but still only buying the house for what it is truly worth.

So don’t be scared to pay over list price for a house you really want!

I have heard the saying before that pricing real estate can be more of an art than it is a science. I think this is very true. Science likes to deal in the absolutes. 1 part Hydrogen and 2 parts Oxygen will always make water, every time. It will never make gasoline. However in art, there are rarely absolutes. The same piece of art can be conceptual or abstract and give the view two different experiences.

Much like art, rarely does a house give two buyers the same reaction. And that reaction alone can make a house more or less valuable to that person.

So why does this matter? Because it shows that pricing a home is not easy, and it is never uniform to a neighborhood, floor plan or bedroom/bath combination. It is more like trying to hit a moving target than it is plugging numbers into a spreadsheet and getting a definitive answer. So when it comes down to finding the house you can see yourself in for years to come, don’t handcuff yourself by thinking the list price is a hard and fast number for the value of that house. That is a great way to miss out on houses in this market.

Now, this is not to say that there are not fail safes along the way to help make sure you don’t overpay for a house. First of all, you should have a qualified buyer’s agent on your side to help you determine the value of the home. You will have the same information the seller has, so if both agents do their jobs, the information should tell the same story. This will help you know if a higher offer is worth it. If the information doesn’t make you comfortable that the value is there, then you don’t make a higher offer. But be prepared to miss out on the home, because there might be a buyer willing to go higher. That is all part of the game.

Secondly, there is the appraisal. The lender (if you are financing the deal) will send out a neutral third party to do a thorough evaluation of the property to determine what they think the property is worth. A lender will not loan more money than the house is worth. Likewise, if you are paying cash, ordering an appraisal yourself is a good idea. This will serve as another opinion on the house to help you feel good about its value.

In conclusion, I hope that this helps to prepare you for what lies ahead in your home search. The more knowledge you have about the process and what is going on right now in the market will help take a lot of stress out of the situation and make it much more enjoyable for you. After all, that is what buying a home should be, enjoyable.